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Lubna Mueen Arbi (M.Com)The Islamia University of Bahawalpur
Growth prospects of Islamic Banking in Pakistan
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Freedom of Muslim world from colonial powers was almost accomplished in the second half of 20th century and
widespread revitalization of Islamic ideology took its path in Muslim societies. Whereby the people started looking at the
existing social systems through Islamic perspective and recommended modifications and improvements. The
Muslim scholars and philosophers challenged the world’s ruling economic and social systems and revealed their weaknesses. Capitalism system was scrutinized and criticized in depth due to its magnitude and general
acceptability in majority of leading societies of the world.
Evolution of Islamic Banking
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QISMUT — Qatar, Indonesia, Saudi Arabia, Malaysia, UAE and Turkey —six regional global markets along with Bahrain, which
are important to the forthcoming internationalization of the Islamic banking industry. They grip a large pool of financial and intellectual capital of the industry that will drive the next wave
of development across existing and new markets. Islamic banks are already serving 38 million customers globally, two-thirds of whom are located in QISMUT. QISMUT Islamic banking assets have reached US$662b in 2013.And expect a CAGR of 19.7% through 2013–18, with total assets reaching US$1.6t
across these six important markets. Globally, Islamic banking assets are expected to grow to US$3.4t by 2018.
Evolution of Islamic Banking (continued)
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• 1970s Some efforts started with no conspicuous results.
• 1980s Bold and comprehensive initiatives were undertaken. Pakistan was ranked amongst the three countries of the world for
commencing non-interest based banking. Various legislations (Companies Ordinance, 1984, Negotiable Instruments Act, 1882, State Bank Act and Recovery of Loans Laws etc. were reviewed to bring these in line with the tenants of Islam. A new interest free Instrument namely; PTC (Participation Term Certificate) for Corporate Financing was introduced and was later replaced with TFC(Term Finance Certificate). Non-Interest Based Instruments (NIB) were announced. In the Conventional Banks separate interest free counters were opened on January 01, 1981. For meeting working capital needs of trade and industry, Musharakah was introduced on July 01, 1982. Profit and loss sharing basis was introduced in Conventional Banks on April 01, 1985.
Islamic Banking History in Pakistan
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• 1990s In November 1991, Federal Shariah Court was established. An announcement was made on December 23, 1991 that transactions involving interest in banks would cease to have effect finally by June 30, 2001.
• 21st Century Commission for Transformation of Financial System Bank of Pakistan. Task Force was set up in SBP to suggest ways and means to eliminate interest from Government financial transactions. However, parallel banking system namely; Conventional and Islamic Banking has continued till today.
Islamic Banking History in Pakistan (continued..)
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Current status (In Pakistan)
Figure 1: Table 1 is taken from IBB March 2014 report presented by BBP
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Money is not a commodity though it is used as a medium of exchange and store of value.
Profit on trade of goods or charging on providing service is the basis for earning profit.
Islamic bank operates on the basis of profit and loss sharing. In case, the businessman has suffered losses, the bank will share these losses based on the mode of finance used (Mudarabah, Musharakah).
The execution of agreements for the exchange of goods & services is a must, while disbursing funds under Murabaha, Salam & Istisna contracts.
Difference between Islamic and conventional banking
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Islamic banking tends to create link with the real sectors of the economic system by using trade related activities.
The status of Islamic bank in relation to its clients is that of partners, investors and trader, buyer and seller
Islamic bank can only guarantee deposits for deposit account, which is based on the principle of al-wadiah, thus the depositors are guaranteed repayment of their funds,
The Islamic banks have no provision to charge any extra money from the defaulters. Only small amount of compensation is being charged and these proceeds are given to charity.
Difference between Islamic and conventional banking (continued)
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Islamic mode of financing • Sharia Based
financing• Sharia Compliance
Modes of financing
Range of Islamic products
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•Mudarabah is a renowned type of Islamic partnership form whereby skill and money are brought together to conduct business. Profit is distributed according to agreement while loss is borne by capital provider (Rab ul maaL) only.
Mudarabah
• Musharakah is a joint enterprise formed conducting some business in which all partners share the profit according to pre decided ratio while loss is shared according to the ratio of contribution.
Musharakah
Sharia Based financing
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1. Murabaha •Murabaha is used as successful substitute product for short term loans and overdraft under conventional banking.
2. Ijara •Ijara has substituted successfully the facility of leasing under conventional financial system.
3. Diminishing Musharakah
•Diminishing Musharakah is used for house financing by IFIs and has supplanted successfully conventional mortgages.
4. Bai Salam •Essentially Bai e Salam is used to fulfill financing of agricultural needs of farmers. Farmers in this contract sell their crops prior to harvesting to IFIs in order to get money for acquiring seeds and fertilizers.
5. Bai Muajjal •Literal meaning of Bai Muajjal is deferred / credit sales. Islamic financial Institutions (IFIs) are using this approach to finance the customers’ needs by supply of anticipated commodities. The modification between Murabaha and Bai Muajjal lies in cost disclosure.
6. Istasna •This tool of financing is useful for infrastructure projects. Parallel Istasna contract is allowed however performance of second Istasna contract must not be conditional on the fulfillment of first contract.
Range of Islamic products
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• Meezan Bank
• Al Baraka Pakistan
• Bank Islami
• Burj Bank
• Dubai Islamic Bank Pakistan
Pakistan Islamic banking financial institutions
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• "And whatever riba you give so that it may increase in the wealth of the people, it does not increase with Allah." [Surah Ar-Rum 30:39]
• "And because of their charging riba while they were prohibited from it." [Surah An-Nisaa 4-161]
• "O those who believe do not eat up riba doubled and redoubled." [Surah Al-e-Imran 3- 130]
Concept of Riba in Islam
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• "Those who take interest will not stand but as stands whom the demon has driven crazy by his touch. That is because they have said: 'Trading is but like riba'. And Allah has permitted trading and prohibited riba. So, whoever receives an advice from his Lord and stops, he is allowed what has passed, and his matter is up to Allah. And the ones who revert back, those are the people of Fire. There they remain forever. Allah destroys riba and nourishes charities. And Allah does not like any sinful disbeliever. Surely those who believe and do good deeds, establish Salah and pay Zakah, have their reward with their Lord, and there is no fear for them, nor shall they grieve. O those who believe, fear Allah and give up what still remains of the riba if you are believers. But if you do not, then listen to the declaration of war from Allah and His Messenger. And if you repent, yours is your principal. Neither you wrong, nor be wronged. And if there be one in misery, then deferment till ease. And that you leave it as alms is far better for you, if you really know. And be fearful of a day when you shall be returned to Allah, then everybody shall be paid, in full, what he has earned. And they shall not be wronged." [Surah Al-Baqarah 2:275-281]
Concept of Riba (continued)
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• From Hazrat Jabir (May Allah be pleased with him): The Prophet, cursed the receiver and the payer of interest, the one who records it and the two witnesses to the transaction and said: "They are all alike [in guilt]
• Jabir ibn Abdallah (May Allah be pleased with him), giving a report on the Prophets Farewell Pilgrimage, said: The Prophet addressed the people and said "All of the riba of Jahiliyyah is annulled. The first riba that I annul is our riba, that accruing to Abbas ibn Abd al-Muttalib (the Prophet’s uncle); it is being cancelled completely.
Hadith on riba and its exclusion from Holy Prophet (peace be upon him)
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• Bayhaqi has also reported the above hadith in Shuab al-iman with the addition that "Hell befits him whose flesh has been nourished by the unlawful."
• From Hazrat Abu Hurayrah (May Allah be pleased with him): The Prophet said: "God would be justified in not allowing four persons to enter paradise or to taste its blessings: he who drinks habitually, he who takes riba, he who usurps an orphans property without right, and he who is undutiful to his parents."
Hadith Holy Prophet (peace be upon him) continued
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2009 2010 2011 2012 20130
50
100
150
200
250
300
100 107
132
186199
100
125
162
225
266
HBL MBL
Financial Analysis(Growth in assets)
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2009 2010 2011 2012 20130
50
100
150
200
250
300
350
100 109
137
178
205
100
131
169
230
289
HBL MBL
Deposit Accounts Growth
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2009 2010 2011 2012 201372.00%
74.00%
76.00%
78.00%
80.00%
82.00%
84.00%
86.00%
88.00%
90.00%
78.30%
80.50% 80.51%
82.08%83.07%
84.73%
81.25%
86.22%
88.24%
86.94%
Chart Title
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Earning asset ratio
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2009 2010 2011 2012 20130.00%
1.00%
2.00%
3.00%
4.00%
5.00%
6.00%
7.00%
8.00%
9.00%
10.00%
8.69%
9.39%8.78%
7.39% 7.61%7.32%
6.94%6.64%
5.55% 5.43%
HBL MBL
Equity Capital to Total Assets
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2009 2012 2011 2012 20130
2
4
6
8
10
12
14
16
18
9.0878.606
9.32310.208
10.72611.03812.204
12.762
14.872
16.183
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Deposits Times Capital
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2009 2010 2011 2012 20130.00%
10.00%
20.00%
30.00%
40.00%
50.00%
60.00%
70.00%
80.00%
90.00%
67.40% 65.60%
53.40%
43.20% 42.70%
81%
54%
44%41%
47%
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Loans to Deposits
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2009 2010 2011 2012 20130
0.5
1
1.5
2
2.5
3
3.5
2.475
2.924 3.012
2.208 2.107
1.401 1.374
2.322
1.8751.713
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Basic earning power
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2009 2010 2011 2012 201387.00%
88.00%
89.00%
90.00%
91.00%
92.00%
93.00%
94.00%
95.00%
90.20%
89.60%
90.40%
91.70% 91.80%
92.80% 92.80%93.10%
92.40%
94.30%
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Debt ratio
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2009 2010 2011 2012 20130.00%
0.50%
1.00%
1.50%
2.00%
2.50%
1.55%
1.84%1.96%
1.42%1.34%
0.83%
1.07%
1.69%
1.26% 1.20%
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Return on assets (ROA)
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2009 2010 2011 2012 20130.00%
5.00%
10.00%
15.00%
20.00%
25.00%
30.00%
17.80%19.60%
22.30%
19.10%
17.10%
11.20%
15.30%
25.40%
22.60%
18.90%
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Return on Common Equity
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Vision Statement
To evolve a stable and distinct Islamic Banking System based on Shariah principles that creates value for all stakeholders particularly the users and providers of
Islamic financial services.
Role of state bank of Pakistan in Islamisation of banks
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• Focal point for all Islamic banking functions, initiatives at SBP
• Strengthen the legal, regulatory and Shariah compliance framework for
Islamic banking Institution (IBIs)
• Adopt/adapt prudential standards issued by international organizations
such as IFSB, AAOIFI to harmonize the Shariah practices in Pakistan
• Steer/facilitate the SBP Shariah Board meetings, and Shariah Advisors’
Forum
• Shariah review of IBIs products
• Coordination with other departments for IBIs’ licensing and branch
licensing
Departmental Objectives
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• Collaborate with ICAP for adoption of AAOIFI accounting
standards
• Industry capacity building initiatives, Awareness and promotion
program
• Focused research initiatives-both empirical and theoretical
• To leverage support from international infrastructure
institutions dealing with Islamic finance i.e. IFSB, IDB,
AAOIFI and IIFM for promotion of Islamic banking in
Pakistan.
• Issuance of Periodic Islamic banking bulletin and News Watch
Departmental Objectives contd..
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IBD OrganogramDirector
Policy Division
Regulations Unit
Prudential Standard
Adoption Unit
Licensing and Coordination
Unit
Product Dev. and Review Unit
Shariah Division
Shariah Board Secretariat Unit
Shariah Standard Unit
Shariah Compliance Unit
Promotion & Dev. Division
Awareness Creation Unit
International Affairs Unit
Capacity Building Unit
Market Analysis and Research Division
Research Unit
Market Analysis Unit
Data Unit
Business Support Unit
Shariah Board Director's Staff
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• Issuance of Shariah Governance Framework
• Issuance of Five year Strategic Plan for Islamic Banking Industry of Pakistan (2014-18)
• Completion of Knowledge, Attitude and Practices Study
• Awareness Creation
• Constitution of Steering Committee for Promotion of Islamic Banking
• Profit Distribution and Pool Management Framework
• Liquidity Management Framework
Recent Initiatives for Promoting Islamic Banking
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• Justice and Objectivity: (equitable distribution of income and wealth)
• Liquidity Ease: (because Islamic banks don’t ensure fixed return to be paid even if bank itself suffered loss)
• Improved Customer Relations: (The banks are prospective to know their fund users better in order to ensure that the funds are used for productive commitments)
• No Fixed Commitments: (any prearranged fixed obligations such as interest payments on deposits)
• Transparency: (profit is distributed in the pre-agreed ratio)
• Ethical and Moral Scopes: (strong ethical and moral magnitudes of doing business and choosing business activities to be financed)
• Destabilizing Speculation:
• Banking for All:
Advantages of Islamic banking over conventional banks
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• Shariah Elucidations (difference of opinions given by different shariah committee which create doubt in the mind of people.)
• Shariah Experts and Specialists: (availability to Islamic banking customers.)
• Product development and execution: . (Till now Islamic banks have altered products from conventional banking which creates doubts in the mind of a common user)
• Competition from conventional banking: (History and volume of conventional banks is much more then Islamic banks so it’s not easy to compare both in same scenario.)
Problems faced by Islamic institutions
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• The major problem what I feel in Islamic banking is difference in international Islamic standard. And they must be synchronized throughout the globe.
• Difference of opinion in religious groups should also be dissolved by having common research platforms.
• Government should promote Islamic banking and give Islamic banks the relief for further promotion.
• Awareness among general public about the differences between Islamic and Conventional Banking.
Suggestions
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• Research and development in the field of Islamic Finance for the development of new Islamic Banking Products.
• Training facilities for HR in Islamic Banking is needed because only Islamic system cannot be implemented if the employees are not equipped with the required Islamic banking training.
• University level courses in Islamic Banking and Finance should be introduced because there no specialized degree is yet been offered by any educational institution in Pakistan.
• Islamic banking research system.
Suggestions